Compulsive Buying Disorder

“Compulsive buying disorder is characterized by an obsession with shopping and buying behavior that causes adverse consequences.” It is found in approximately 5.8% of American citizens; of that 80% are female[i].

 

While you may not suffer from a compulsive buying disorder to the point that it has adverse consequences in your life, most of us are guilty of spending money we don’t have for things we don’t really need, whether it is that magazine that catches our eye while checking out or that new movie on the flashing display when you walk in the store.

 

I myself am guilty of it, my personal enemy; Bass Pro. It has such an effect on me that I feel guilty leaving the store with nothing. Let’s get one fact straight – products are placed purposely in stores and packaging and displays are meant to catch your eye. Companies spend millions of dollars each year preying on our inability to say no. So how do we counteract these urges of ours? How do we train ourselves not to pick up that shiny item we all know we must have?  There are many ways to combat this but here are a few strategies that I personally use.

 

·         Making a list ….and sticking to it

·         Leaving your credit cards in the car and only taking in the cash you need

·         Setting a time limit to how long you will stay

·         Taking a friend, preferably one who does not share your enthusiasm

·         Only go when you absolutely need something, not just to browse

Making a list and sticking to it! Making a list before going anywhere is easy and practical. Whether it is a list of things to do that day or a list for the grocery store, it will help you stay on track and be productive. Doing it is one thing but sticking to it is a whole new ball game, because if you can’t do that the list was a waste of your time. A good strategy is to know where you’re going and head straight there because you might need milk, but it’s not going to help if you walk through four isles to get there.

 

Leaving your credit cards in the car and only taking in the cash you need. This personally is my biggest helper. Often I find myself spending more money then I should with the justification of putting it on my credit card. So make it easier on yourself and don’t even bring it in, trust me it will make your life a whole lot easier.

 

Setting a time limit on how long you stay. This may seem a bit rudimentary but I really think it does work. By setting a time limit on how long you stay it helps you from browsing and finding that one item you can’t live without. Make it something practical like 20 minutes in the grocery store. It obviously applies to different situations so just use your best judgment.

 

Taking a friend, preferably one who does not share your enthusiasm. I myself find it a lot easier to stay on track when I’m not alone in the store, they too know what you came there to get and for the most part add a second opinion on any purchases. Don’t take in a friend who enjoys the same thing you do. When I go to Bass Pro with my brother I know it won’t end well because we both love to hunt. However, put me in bass pro with my girlfriend and I’ll bet you my bottom dollar she won’t let me leave with something I don’t absolutely need.

 

Only go when you absolutely need something, not just to browse. Going to a store just to “have a look” is a set up for failure. Only go when you absolutely need something. And even then use the other strategies we discussed before, make a list, only bring in the money you need, and bring a friend who will keep you on track.

Like I said before these are by no means the only strategies to prevent compulsive buying, but they are a good start. Try some of these the next time you go out and see how they work.

 

by Robert Self, Personal Financial Planning student
(with edits by Ryan Law)

 

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[i] http://en.wikipedia.org/wiki/Compulsive_buying_disorder

 

 

Ryan H. Law, M.S., AFC

Department of Personal Financial Planning

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

239E Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

A Tax Break on the Table?

There is a lot of talk going on about taxes and budget reductions, as our elected representatives take their stance and lean toward the inevitable compromises.  When you look at Europe and the changing landscape of our world, in the context of our history and our current national debt – to say nothing about our personal debt – there is much to be confused about and no shortage of actions that need to be taken.  The trouble is, of course, the politicians can’t agree with each other on the actions and my personal opinion is that they seem to be more concerned about their personal beliefs and re-election than they are about those of us who sent them to Washington.  Yet, I digress.  I need to write an educational piece for the week….

 

When I was driving back from a meeting in Kansas City, on Wednesday, I heard a report on National Public Radio about the mortgage interest tax deduction.  It is, in some form, on the table to be reduced, if not eliminated, as a means to increase federal revenue.   As the Tip is designed as an educational tool, let’s see if we can use this debate to educate.

 

First, what is a tax deduction?  A tax deduction is an expenditure that is subsidized by the federal government.  A tax deduction reduces the income that is subject to taxation dollar for dollar.  Assuming other tax deductions exceed the standard deduction, $1,000 in additional mortgage interest will cost you the after tax amounts in the following table.  Notice how the cost varies with your marginal tax bracket.  As can be seen, higher income consumers (i.e., higher tax bracket consumers) receive the greatest subsidy from a tax deduction.  From the lowest to the highest, the highest marginal tax bracket households pay $296 less, or a 32.89% lower price, for the same $1,000 of interest paid by both marginal tax bracket households. 

 

Marginal Tax Bracket	Single Income	Married Filing Jointly Income	After-tax cost of additional $1,000 in mortgage interest	Percentage reduction as move to each higher tax bracket
10% Bracket	$0 – $8,425	$0 – $16,850	$900
15% Bracket	$8,426 – $34,200	$16,851 – $68,400	$850	-5.55%
25% Bracket	$34,201 – $82,850	$68,401 – $138,050	$750	-11.76%
28% Bracket	$82,851 – $192,000	$138,051 – $232,950	$720	-4.00%
36% Bracket	$192,001 – $375,700	$232,951 – $375,700	$640	-11.11%
39.6% Bracket	$375,700+	$375,700+	$604	-5.62%

 

Homes are good for the economy and homeownership is generally considered to be a positive for communities.  High income households have higher rates of homeownership, with 89.3% of the top income quintile being homeowners, compared to 32.6% of the lowest income quintile being homeowners.  High income households also purchase larger houses and borrow more money to purchase those homes.  We, as a country, support this by providing the largest subsidy to them to purchase their home.  James Poterba and Todd Sinai report the following (paper available at: http://real.wharton.upenn.edu/~sinai/papers/Poterba-Sinai-2008-ASSA-final.pdf ):

 

Household Income	<$40,000	$40,000-$75,000	$75,000-$125,000	$125,000-$250,000	$250,000+
Average Tax Savings from the mortgage interest deduction	$91	$523	$1,264	$2,703	$5,459

 

Thus, the greatest subsidy is given to the higher income households, both in percentage terms and dollar terms.  So, what is the talk coming out of Washington?  Current law allows homeowners to deduct the interest they pay on homes mortgages of up to $1 million in principal borrowed.  One proposal calls for this to be reduced to $500,000 and for the interest on mortgages to purchase second-homes to be eliminated as a tax deduction.  Professor Wheaton of MIT predicts that what will eventually come out of the Senate Committee is a similar proposal, except the tax deductibility of mortgage interest will be changed to a constant percentage tax credit for all households, regardless of taxable income, perhaps 10%, 12%, or 15% of the interest paid.  (His radio interview is here: http://www.npr.org/2011/07/20/138555793/mit-professor-discusses-mortgage-deduction-reform.)

 

If an indicator of financial success is the house we own, we should consider the question of the effect of the tax deduction.  Does the United States’ tax deductibility of mortgage interest change homeownership rates and average house size, when compared to a country with a different system of taxes?  Fortunately, we have a good example.  We can compare the United States, where mortgage interest is tax deductible, to Canada, where mortgage interest is not directly tax deductible.  I will summarize in a table:

 

Characteristic	Canada	United States
Percentage Homeowners [1]	67%	65%
World rank in house size [2]	#1	#4
%Equity in owned home [3]	70%	45%

Sources:

[1] http://www.nationmaster.com/graph/peo_hom_own-people-home-ownership

[2] http://www.nationmaster.com/graph/peo_siz_of_hou-people-size-of-houses

[3] http://en.wikipedia.org/wiki/Home_mortgage_interest_deduction

 

It appears that homeownership rates are relatively similar between the two countries.  It is a little surprising that the average house size is, in fact, greater in Canada than the United States.  One might conjecture, however, that the lack of mortgage interest deductibility seems to have depressed the percentage loan-to-value ratio in Canada to 30% compared to 55% in the United States.  Stated another way, Americans have more debt in their home than their neighbors to the north.  Perhaps this is due to the upside-down subsidy from the tax deductibility of mortgage interest.

 

There is, of course, much more to this story than what I’ve written.  The main point is that we have choices to make.  This is but one.  Each one of us has deeply held beliefs about policies and some of these beliefs are based on facts, some are based on political philosophy, and some based on emotions.  I am a bit affected by all three, most of the time.   I do encourage you to be informed and make up your own mind.  Let your congressional representatives know how you feel about this topic or others, as is required by a successful democracy. 

 

Other parts of the NPR radio show that spurred my thinking on this topic:

 

National Association for Realtors: http://www.npr.org/2011/07/20/138555795/economist-for-realtors-group-discusses-mortgage-deduction 

From the Associated Press: http://www.npr.org/templates/story/story.php?storyId=137544950

Center for American Progress: http://www.americanprogress.org/issues/2011/01/te_012611.html

Corporation for Enterprise Development: http://scorecard.cfed.org/housing.php?page=homeownership_by_income